About four years ago we decided that the hassle of continuing our HUD insured mortgage was not worth the effort, e.g.; special accounting forms that cost us via our CPA firm, reserve fund under control of HUD, numerous clerical errors by HUD, etc.

However, we were not really refinancing. All we wanted to do is rollover our existing mortgage without extending the life of the mortgage.

So, we contacted a number of banks and asked what it would take to convert, e.g.; interest rate, balances, relationships, etc. Oh, we did decide to seek a line of credit and asked for the terms as well. The line of credit is employed only to finance capital expenditures before the yearly assessment replenishes the coffers.

Then based on the terms, our board selected a bank and we converted, closing the HUD guaranteed mortgage and obtaining a new mortgage ending on the date of the original mortgage as well as the line of credit. Our outside counsel handles the transaction.

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Now a nearby building had a $7,000,000 mortgage when they converted to co-op 25/30 years ago. In turn, they refinanced the mortgage to $10,000,000 and extended the term. About a year ago, (we can speculate as to the financial acumen of the board of directors), they found themselves in dire straits and needed an infusion of capital to underwrite long neglected capital projects, e.g.: roof, window replacement, driveway replacement, etc.

So they went and a refinanced a second time (third mortgage) and in doing so, they were required to pay off the second mortgage, about $7,000,000 remaining, pay a prepayment penalty of $2,500,000 and then the bank required $8,000,000 of the remaining proceeds to be placed in escrow, only to be released by the bank for authorized capital projects.

So poor management (e.g.: bad decisions by the board of directors) put the building into such a predicament that the bank is now essentially calling the shots.

So just a word of caution in any “refinancing”, ya need a long term plan to eliminate all debt. For a product producing corporation, capital infusion equals new product equals more income equals paying off the debt. In an apartment building, there ain’t no way to build more apartments to obtain more revenues.